You may be aware of SIPs or systematic investment plans, but most people do not know what an STP is. While there are certain similarities between SIPs and STPs, here is a detailed look at what a systematic transfer plan is and how it works in favour of investors.

What is systematic transfer plans?

Systematic transfer plans are specialized plans where your money is transferred automatically from one mutual fund investment scheme to another. This is similar to SIPs, but here the money you make through investments is transferred in other investments. However, in the case of SIPs, the money from your savings account is transferred in investment schemes.

With systematic transfer plans, investors are can invest a sum into a specific mutual fund. The money from this fund can then be transferred into other schemes in order to diversify the investment profile. Furthermore, such diverse investment will also reduce the risk of losing money.

Benefits of STP investments  

If you have excess funds in your mutual funds, you should consider engaging a systematic transfer plan. Here are some benefits of such a plan.

1. Decreased market risk

In case of a lump sum investment, you are liable to invest a huge sum of money at once. This may lead to greater liabilities and reduced return on your investment. However, with STP, you are investing over a period, which reduces the chance of incurring losses. Instead, you may end up with sizable profits.

2. Returns are greater

Unlike lump-sum investments, an STP allows you to invest in both debt and equity instruments. Therefore, you are ensured a diversified investment portfolio, where the risk and returns are balanced. The debt funds ensure lower risk, while the equity investments will earn you sizable returns.

3. Adjustable rate of investment

Even if you sign up for an STP, you can change the rate at which you invest. You can increase the speed of your investments or slow it down depending on the prices of the stocks in the market. You are free to change the rate of investment at any time during the tenure of investment.

4. Rupee cost averaging

Investments through STPs allow you to buy different equity stocks at different net asset values. This will help you to average out between the market highs and lows. Therefore, this rupee cost-averaging factor in STPs will further decrease your chances of incurring losses.

You should consider investing through SIPs if you are a completely new investor. However, if you are sitting on returns from mutual fund investments, you should look into STPs.

Mutual funds investments are safer for amateur investors, but you have to choose from a range of options while investing in such schemes. Some of these options may be similar to each other in certain aspects, which can lead to confusion. Index funds and ETF are two of the most common types of mutual funds, where the distinctions can be unclear. Therefore, here is a look at the difference between the two.

Definition of ETF and index funds

Before understanding the intricacies between the two, you need to understand what is ETF and what is an index fund.

An ETF or exchange-traded fund is an investment scheme where the money is invested in stock exchange assets, which include bonds, securities, and stocks. Here, the fund tracks a specific index and the investment portfolio mimics the composition of the index. ETFs are a great investment source if you are looking for tax-efficient and low-cost options.

Now that you know what an ETF is, you should understand what is an index fund. An index fund refers to a mutual fund or ETF, which is designed to follow a specific industry or index in the market.

ETF vs. Index funds

1. The base

When you invest in ETF, you should know that it would be traded like other stocks in the market, rather than other mutual funds.

On the other hand, an index fund is similar to all other mutual funds investment and is not traded directly in the stock exchange.

2. Pricing

Since ETFs are investments in the stock exchange, the price of each share depends on the demand and supply of that particular stock in the market. Therefore, there is a greater chance of volatility of the market in case of exchange-traded funds.

However, for index funds, the stock market does not determine the price of its units. Instead, it is subject to the changes in the Net Asset Value.

3. Cost of trading

ETF investments will cost you for every transaction in the stock exchange, which will drive up the overall cost of investment.

Index funds do not have any transaction charges. You are free to invest as much you want without incurring any additional charges.

4. Initial investment

For exchange-traded funds, there is no set minimum or maximum value of the investment. Investors are free to invest as much or as little as they want.

For an index fund, you may need to invest up to a few thousand Rupees. Alternatively, you may need to become a regular investor through SIP investment.

Keep these pointers in mind while determining which of these funds match your investment profile better.

Mutual funds investments are a simple way of growing your wealth over time. However, before investing through these instruments, you need to understand what Net Asset Value (NAV) is.

What is NAV?

When you invest money in mutual funds, your money is invested in stocks, securities and bonds. NAV is the total value of funds in a mutual fund divided by the number of units where the money is invested. Therefore, net asset value can also be referred to as the price per unit in a mutual fund investment scheme.

Now that you know what is NAV, you should also understand what AUM stands for. AUM or Asset under Management is the total asset that a particular mutual fund is managing. While you may calculate NAV for each fund manually before investments, some online websites allow you to see this value directly, regardless of whether you pick large cap mutual funds or the small cap ones.

How does NAV affect mutual fund returns?

Net Asset Value does not affect mutual fund returns in any way. However, most new investors, incorrectly attach a lot of importance to a fund’s NAV. Older mutual funds have higher NAV, and vice versa. While most people feel buying a mutual fund with lower NAV is better, it is not so simple. You should never determine the potential of a scheme by its NAV and instead focus on its past performance.

Why NAV should not be a determining factor for picking mutual funds

Consider an example where you are investing in two mutual fund schemes (A and B), where asset held, investment style, fund manager, etc are all the same. The only difference between the two is their NAV. The NAV for scheme A is Rs. 20, while the NAV for scheme B is Rs. 50. Now, consider that 20 percent of the assets from these funds are invested in the same company.

After the investment, the shares of the company appreciate in value by 10%. Therefore, the new NAV for A will be Rs 20.4, while for B it will be Rs. 51. Even though it seems that the returns in B would be higher, this is not the case.

Suppose the initial investment in both A and B was Rs. 100 each. Therefore, at Rs. 20 per unit, you would be able to buy 5 units of fund A with your initial investment. Similarly, you would have been able to buy 2 units of fund B at an initial NAV of Rs. 50.

Now, taking into account the updated NAV, when you sell all shares of A, you would be able to make Rs. 20.4×5, which is equal to Rs. 102. Similarly, from fund B, you would be able to make Rs. 51×2, which is equal to Rs. 102. Therefore, regardless of the NAV, you would end up with a profit of Rs. 2 from both funds A and B.

This is why you should compare the past performance of mutual funds and not the NAV, as the NAV does not play an important role in the fund’s performance.

Are you interested in mutual funds investment? Do you know what is elss funds? ELSS funds or equity linked saving schemes are mutual funds that allow you to save on paying taxes on your earnings through your investments. Taxes can erode your returns from investments and you should protect your earnings from the same. Furthermore, ELSS schemes can assist you to form a retirement fund as well.

Here is a look at how ELSS investments can help you save taxes, while also aiding you to save money for retirement.

1. Encourages you to save

Rather than keeping your money in a savings account, investing in ELSS will help you earn, while also keeping your funds safe from annual income tax deductions. Under section 80C of the Income Tax Act, you are liable for a tax exemption of up to Rs. 1,50,000 from your total taxable income.

2. Shorter lock-in period

Since ELSS funds have a limited lock-in period of 3 years, you are free to use the invested sum as you wish. Therefore, ELSS schemes have an open-ended nature, which further encourages investment and tax saving. However, it is better not to redeem the returns as soon as the lock-in period ends, as you would get better returns if you stay invested for longer tenures.

3. The chances of good returns are higher

ELSS schemes invest your money into equities, which is risky. However, with great risks come even greater returns. The higher returns will help you accumulate a sizable wealth by your retirement age, even if you start investing in your mid-30s. Therefore, young professionals can secure their retired life with ELSS investments, if they are willing to ride out the volatile equity markets.

4. Tax saving leads to greater returns

With the money you save on taxes, you can start another ELSS investment, leading to even greater returns. Furthermore, with ELSS investments, you have access to the benefits of equities.

5. Sector funds investment

Unlike other mutual funds schemes, an ELSS investment offers you the opportunity to pick a sector where you want to invest in. For instance, if you think that the banking or the infrastructure sector will perform well in the future, you can choose to invest in the equities from these sectors. These are known as sector funds. However, ensure that you know about the various sector funds before investing, to ensure maximum returns.

Therefore, equity-linked saving schemes have a lot to offer other than being a simple tax savings tool. You can easily build your own retirement fund from such investments.

If you invest in elss mutual funds (Equity Linked Savings Scheme), you are entitled to a tax deduction under Section 80C of the Income Tax Act, 1961. ELSS funds have a maximum lock-in period of 3 years (which can help you tide over market volatility). Among all the tax-saving investment schemes permitted under Section 80 C, ELSS has the shortest lock-in period.

These funds invest about 80% of its corpus in stocks and equity. So, it is a risky investment option. However, like other equity-related investments, the chances of accruing high returns are there. To invest in ELSS, your investment horizon should stretch from 5-7 years, which will balance out the market highs and lows. That is why the elss fund is an ideal way to multiply your wealth over a period of time.

Here are some recommended ELSS Mutual Funds you can invest in the –

1. Axis Long-term Equity Fund: this wildly successful Mutual Fund was launched on December 29, 2009. With a net worth of nearly INR 17,000 crores, it is one of the heavyweights in this category. It has weathered the market volatilities and has consistently over-reached the benchmark. 87% of its assets are in large-cap securities.
2. Franklin India Taxshield: it was launched in 1999, and it has been crossing its benchmark for the past 10 years. Its Net Asset worth is INR 3,651 Lakh. It invests 78% of its assets in stocks with excellent valuation and high growth potential.
3. DSP Tax Saver Fund: it was launched in January It follows a bottom-up investment strategy and directs 80% of its fund to large-cap stocks. Its returns for the last 3 years and 5 years have been at 14.7% and 21.2%. It has a net worth of INR 4,373 Lakh.
4. Reliance Tax Saver Fund: it was launched on 21^st September 2005 and it is one of the most aggressive ELSS funds in India. It has outperformed its benchmark in the 5 years, 7-year and 10-year categories, and out-paced ELSS average returns by 2-3 percentage points. 97% of its allocation goes into large-cap companies. Its net worth is INR 9,630 Lakh.
5. ICICI Prudential Long Term Equity Fund: it was launched on 19^th August It follows the value investment method and it has generated at 21% CAGR since then. This fund has consistently outperformed its benchmark in the last 10 years. It invests 80% of its corpus in large-cap companies. Its net assets are worth INR 5,386 Lakh.
6. Aditya Birla Sun Life Tax Relief: it was launched on 29^th March 1999 and since then has generated at 25.3% CAGR. 87% of its portfolio comprises large-cap Its approach follows a combination of value and growth styles of investment. Over the last 3 and 5 years, it has delivered returns at 16.6% and 24.1%. It has a net worth of INR 6,628 Lakh.

If you have the appetite to accept risks, then ELSS fund is an attractive option not just because it pays rich dividends but also because you can avail tax benefits. You should meticulously go over the performance of the fund and only then should you decide to invest in it.

Gilt funds are a specific kind of debt fund, where your money is invested in central government loans, government securities and state development loans for medium to long tenures. Since these are fixed income mutual funds, investors would be able to rake in regular earnings on their investments, even though the returns may vary.

Features of gilt funds

Now that you know what is gilt funds, here is a look at the features of such schemes.

• Gilt funds are controlled by the Reserve Bank of India.
• The lower risk involved with gilt funds make it an ideal investment instrument for risk-averse
• The returns are lower than from similar investment in equities.
• Gilt funds have a maturity range between 3 to 5 years after the initial investment.
• Gilt funds are best suited to people who want to accumulate wealth over a moderate duration. However, if you are looking for great returns in a matter of a couple of years, you should consider other investment options.
• The returns from gilt funds are taxable. The exact amount of tax depends on the tenure of the investment. For instance, if you invest for less than three years, your income is known as short-term capital gains (STCG). While investing for more than 3 years and earning returns is classified as long-term capital gains (LTCG).

The risk involved with gilt funds

A common misconception among investors is that gilt funds are completely risk-free. While it is true that these schemes have a lower risk profile than many other investments, they are, by no means, completely secure. The government securities are free from any risk, but the price of the units may vary, leading to ever-changing net asset value (NAV).

However, it is important to understand that gilt funds are still much safer than investing in equities. In the short-term, investors may get negative returns due to the constantly changing NAVs for the securities. However, unlike equity funds, investors can rest easy knowing that they would at least get the principal sum back, in case of gilt funds.

Returns from gilt funds

Investors can get up to 12% returns from a gilt funds investment. However, there is no guarantee regarding the returns due to the highly variable characteristic of the rates. Investors would do well to invest in gilt funds when the interest rates are declining. In fact, when all other investments are performing poorly due to disturbances in the market, you should invest in gilt funds to rake in better returns.

Keep these pointers in mind if you are looking to invest in gilt funds and increase your overall wealth.

Mutual funds investments are safer than direct investments into stocks. However, one problem with certain types of mutual funds like ELSS is that they lock in your money for a specific period, during which you are unable to use the funds in question. This lock-in feature is often difficult to handle for the young investor, which is why fixed income mutual funds are a great option for these people.

What are fixed income funds?

Fixed income mutual funds are schemes where investors earn returns after regular intervals, such as quarterly, monthly or half-yearly. The rate of return may change over time, which is why the income may not be a fixed amount. Furthermore, the return depends on the performance of the specific fund as well.

There are three main instruments of fixed income mutual funds that an investor can take advantage of if they are looking for regular returns.

Components of fixed income funds

1. Debt Fund

Debt funds invest in debt instruments, such as corporate bonds, government securities, and debentures. Market volatility is limited and returns from debt funds are usually predictable. Common types of debt fund include-

• General debt funds- These schemes invest your money into general government securities and debentures.
• Monthly income plans- Also known as MIPs, investment in these schemes will result in monthly, quarterly, half-yearly or annual payouts. Here, a majority of the sum is invested into debt instruments, while the remaining is invested into equities.
• Gilt funds- These are long-term investments into government securities, where the rate of return varies greatly over time.
• Liquid funds- Most investors wonder what is liquid funds? It is a kind of fixed income mutual fund, where your money is invested in treasury bills and certificate of deposits. The maturity period is between 3 and 6 months.

2. Exchange Traded Funds

Index funds are known as Exchange traded funds or ETF, as they are exchanged in the stock market. Investors are free to buy as many units of ETFs as they like, without any restrictions. Since investors have the option of buying and selling at any time, ETF investments offer great liquidity.

3. Money Market funds

Money market mutual funds are those schemes where the money is invested exclusively into commercial bills, commercial papers, certificate of deposit and treasury bills. The minimum lock-in period is 15 days and the market is regulated by SEBI.

Features of fixed income funds

Now that you know what liquid funds and debt funds are, you need to understand the basic features of fixed income mutual funds.

• Provides regular income to the investor
• Can act as an alternate source of income for retired persons, apart from the pensions
• Managed by professional fund managers, so that the return remains profitable for the investors
• Stable returns even when there is a major disturbance in the market.

Keep these fixed income mutual funds features in mind before investing, to ensure the maximum returns.

Mutual funds investments are considered to be safer than direct investment in stocks since fund managers manage your invested money and ensure you end up with good returns. However, choosing the correct mutual fund to invest in is something that an investor has to figure out. You not only need to look at the rate of return for the various schemes, but also take into account the duration of the investment its past performance.

A mutual fund calculator can be instrumental in determining the best mutual fund investments for you. It is not only easy to use but also readily available across most online mutual fund portals. Here is a look at how you can use a mutual fund calculator.

Procedure for using mutual fund calculator  

A mutual fund calculator will tell you the kind of returns you can expect from your investments. However, you would need to specify certain parameters, so that that calculator can determine the return. These parameters include –

• Nature of investment- Mutual funds investment can either be through a systematic investment plan (SIP) or through a lump sum investment. You need to choose which kind of investment you will be using.
• Amount of investment- This is the principal sum that you are looking to invest. For SIPs, the amount of investment will signify the amount of periodic investment and not the entire sum.
• The frequency of SIP- This parameter is only relevant if you are investing through a SIP. You need to choose between the different options, such as fortnightly, monthly or quarterly.
• The expected rate of return- Here you need to enter the expected rate of return from the scheme you are looking to invest in. The figure will be in percentage and will determine the expected return on the invested sum.
• Duration- For lump sum investment, you need to enter the tenure of the investment. For SIPs, you need to mention the duration of the systematic investment plan.

Once you enter all of these details, you need to click on calculate. The mutual fund return calculator will give you an estimated return on the investment you are about to make.

Benefits of mutual funds calculator

Here is a look at why you should use the calculator, before investing in mutual funds.

1. Easy to use

The calculators are very convenient to use and can help you compare the returns from various mutual fund schemes when you are looking to invest. This calculation helps in the decision-making process and allows you to form realistic expectations.

2. Only details about the scheme required

The mutual fund return calculator is greatly advantageous since you only need to enter specific details about the scheme you are investing in. No other details are required apart from this information.

3. Free to use

The calculator is available online and can be used innumerable times without incurring any additional charges.

However, keep in mind, that the calculator will only show an estimated return and not a guaranteed return. Changes in the market may affect the results for your investment.

A systematic investment plan or SIP is a specialized form of investing money in mutual funds. In such an investment, investors do not invest a lump sum amount on schemes, but instead, invest smaller sums at regular intervals of time over a fixed duration. Unlike regular mutual fund investments, where you need to invest a substantial amount of money to get decent returns, SIP investments can be started with limited funds.

Here is a look at a few reasons why investments through systematic investment plans are beneficial for you.

1. The importance of saving

In SIP investment, the money from your savings account is used for investments. If you have opted for a monthly SIP, a specific sum of money will be deducted from your savings account each month. Therefore, not only will you be encouraged to save money for the SIP payments, but also your savings will start earning you even more money in the long run.

2. Rupee-cost averaging

In ordinary investments, you would have to time the market precisely, so as not to incur losses on the invested sum. However, with the rupee-cost averaging concept in SIP investments, you do not need to time the market. In the case of a declining market, your money would be used to buy more units. Similarly, for an improving market, few shares are bought. This is possible due to the periodic investment of money, instead of a lump sum investment. Systematic investment plans do not guarantee a profit on the investment but limit the risk greatly.

3. A convenient process of investment

Unlike other investment procedures, a SIP investment is very simple to follow. You can start investing in just three simple steps, in case of a SIP. Here is a look at what those steps are-

• Register for the SIP investment online.
• In the website, fill up all the necessary details, such as name and bank account details.
• Ensure that you have the funds available for the investment in your bank while completing these steps.

4. Disciplined investing

Investment in SIPs will inculcate the habit of saving on a regular basis, which is essential if you want to be a successful investor. Systematic investing will help you stick to a budget and is often more profitable than investing a large sum of money at once.

5. SIPs are affordable for all

Unlike other investment procedures, where you might need to pay a charge at the start of the investment, SIP investments are completely free of any additional charges. Furthermore, investors are free to start their investments with an amount as low as Rs. 500 each month.

Therefore, if you are considering investments, start with SIPs, as they will help you achieve your investment objectives.

Mutual funds are defined as a pool of money that a group of investors invest to earn profits. Just as the profits are shared within the group of investors, the losses are also incurred collectively. However, different classes and kinds of mutual funds are available in the Indian market. They can be classified on the basis of structure and asset class.

Division based on asset class

1. Equity funds

As the name suggests, the money is invested in various stocks and equities with this kind of investment. The returns are higher, but so is the risk profile for these mutual funds.

2. Debt funds

In these schemes, the money is invested in company debentures, government bonds, and fixed income shares. Debt funds have low risk associated with the investment, but their returns may be limited.

3. Money Market mutual funds

The money is invested in liquid instruments, such as T-Bills, in order to create a relatively risk-free profile. Furthermore, money market investments allow the investor to get an immediate return from the investment. It is best suited to people looking to invest large sums of money.

4. Balanced or hybrid funds

In these investment schemes, the money is invested in both debt and equity instruments. Hybrid investments schemes are perfect for investors looking to maintain a balance between the risk and the returns.

5. Sector funds

In the case of sector funds, the money is invested in a particular sector of the market, such as banking or infrastructure. The performance of the fund depends directly on the performance of the sector in question.

6. Index Funds

These funds are instruments of investments in a fund that mimics a particular index of the stock exchange.

7. Tax Saving funds

Similar to equity funds, taxes saving schemes invest your money in equities. However, investors who invest in these schemes are liable to receive an annual tax exemption on their earnings from the said investment.

8. Fund of funds

These mutual funds invest your money into other mutual funds and the return depends on the performance of those funds.

Division based on the structure

9. Open ended funds

Many new investors wonder what is open-ended mutual funds? Well, mutual funds where units are purchased and redeemed throughout the year are known as open ended funds. The investor is free to transact in the market, without any limitation. The NAV for each unit is the price at which the transactions take place.

10. Closed end funds

Closed end funds are those investment schemes where units can be purchased at the initial stage only. Furthermore, investors can redeem their investments only after a pre-determined maturity date.

Mutual funds can also be divided into growth funds, liquid funds, and income funds based on investment objectives. However, this classification takes into account the personal goals of the investor, unlike above-mentioned ones.